By Shuli Ren

Despite the ramp-up, J.P. Morgan thinks the Macau stocks still look attractive, and expect Macau earnings to be resilient to economic downturn.

Investors have expressed concerns that the credit-driven VIP segment may be more susceptible to macroeconomic downturn in China.

The broker is not worried, and has an interesting thesis to defend its double-digit VIP gaming revenue growth forecast.

Casinos have the bargaining power to force shadow VIP side betting, whose revenue they can’t capture, to come into the official channels, thereby propping up VIP gaming. Here are analysts Kenneth Fong and Daisy Lu:

Industry aggregate EBITDA per mass table exceeded EBITDA per VIP table for the first time this year. Thus, to make sure that resources are properly deployed, casino operators have to constantly optimize the ratio between mass and VIP tables in order to maximize profitability. This is especially true since the government imposed a gaming table cap. As mass profitability per table goes up, operators lift the minimum rolling turnover requirement for junkets to justify keeping a table VIP, rather than mass.

Under pressure to deliver more volume, junkets/agents could find themselves negotiating with their players to move some [VIP] side bets into official channels.

An article in the South China Morning Post dated 13 August 2012, which was written after extensive channel checks, reports that side betting could be 20-200% the size of the official VIP market. While junkets may not completely control how much betting goes above the table and below, we believe side betting’s substantial volume provides a buffer for junket operators in managing their rolling volume and overall business.

With the exception of Galaxy Entertainment (Neutral), the broker has a Buy rating on all the stocks: Sands China, a unit of Las Vegas Sands (LVS); MGM China, a unit of MGM Entertainment (MGM); Wynn Macau, a unit of Wynn (WYNN); Melco-Crown (MPEL); and SJM.

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OCTOBER 4, 2013 12:01 P.M.

Spokanimal wrote:

The government's gaming table cap has created several methods by which casinos can run more profitably, as well as more efficiently. Compelling junkets to insist on more "above board" bets in order to preserve their table allocations is just one of them.

Mass market tables are also seeing their betting minimums rise as waiting lines queue up for patrons to get a seat at the scarce number of tables that still have reasonable table betting minimums.

Similarly, patrons who are priced out of a live table by those minimums are increasingly patronizing electronic "stadium" games, where minimums are lower and the casino overhead required to run such games is also much lower.

In an industry where the government has moved to curb supply in such a profitable way, only Las Vegas Sands has opened substantial new hotel and gaming capacity over the past year that allows them to substantially grow in such a supply-constrained environment...

... and we're still more than 2 years away from the introduction of any substantial NEW casino capacity to effectively compete with LVS... additional capacity that will include LVS's own new large Cotai resort, the Parisian.

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Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.